Management And Accounting

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MANAGEMENT AND ACCOUNTING

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Management and Accounting.

Management Planning and Controlling.

Management Planning and control are both processes in the management process which

are closely related. However, there exists a clear difference between the two management

practices.

Management planning involves coming up with a detailed structure of activities that

require an implementation to achieve specific set objectives of an organization (Drucker, 2012,

p.76). The planning process consists of nine steps that need to be followed to obtain a practical

plan. The first step involves an understanding of the venture. Then appropriate allocation of the

available resources is necessary (Morden, 2017). The second step requires the gathering of

relevant information in the business operation. This information useful in the third step which is

setting objectives for the organization. Targets are then arranged to start with the most crucial

ones. Once goals are in place, a forecast occurs of what to expect in the future and strategies

devised to meet the expectations (Morden, 2017, P.271). A course of action is necessary at this

point for evaluation before implementation. An alternative course of action is put in place in case

the first plan does not work.

On the other hand, management controlling refers to activities that monitor the

implementation of a set management plan (Drucker, 2012). When deviations occur, management

control measures help to correct them and point the course of actions back to the pursuit of the

set objectives. Management exists in each level of the organization and is a continuous process

unlike planning (DRURY, 2013). The primary goals of controlling are ensuring effective use of

allocated resources and facilitate coordination.

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For example, when a company wants to venture into a new market, it comes up with a

clear strategy on how to penetrate and the sales strategy to implement and this is management

planning. Once implementation takes place, any deviations from the plan involve management

control.

Inventory Valuation

Cost accounting is that branch of accounting that deals with accounting for inventory.

Determination of costs used in the production process is vital in planning for ways of improving

profits and cutting down costs. There are three methods of inventory valuation namely variable

costing, Activity-based costing (ABC) and Absorption costing (Blocher et al., 2010, p.68)

Variable costing is a method that involves the assigning of costs only directly attributed

to the production process of a batch of commodities (variable costs). Some variable costs include

direct materials and the direct labor. Overhead expenses used in the production process are not in

the variable values. Instead charged as expenses in the period in which they occur (Taschner and

Charifzadeh, 2016). Overhead costs are those that do not have a direct relationship with the

production of certain goods. They include expenses like rent and insurance.

This method of costing may lead to the realization of a higher gross margin after the sale

of produced products since some costs attributable to production get omitted. Variable costing is

useful when there is need to determine the lowest possible price a commodity can be sold in the

market, conducting a break-even analysis to determine when a particular line of product will

make precisely zero profits and when there is need to formulate internal statements into a

contribution margin format. Variable costing method is not commendable in the financial

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reporting according to IFRS standards since it does not give an accurate and fair view of the total

cost of producing a commodity.

Full absorption costing is an alternative method of inventory valuation that takes all costs

associated with the production process and the redistributing or apportioning them to each final

product (Blocher et al., 2010). The costs allocated include, direct labor costs used in production

work, direct materials that went to the production, fixed overhead costs such as rent and variable

overhead expenses such as electricity. In this method, values are assigned to predetermined

constant cost pools and then the usage calculated per unit of production. The usage gets divided

with the total production costs to arrive at a total cost of production for each group.

This method is recommended in financial reporting since it takes into consideration the

overhead manufacturing costs, unlike variable costing. The only setback is that some expenses

get assigned to products that did not utilize them while others are over under absorbed. Over

absorption occurs when the costs assigned are higher than the real prices used in the production

while under absorption will happen when a product gets fewer production costs allocated than

the reality. The result is that a considerable amount of production costs are untraceable to the

product (Taschner and Charifzadeh, 2016). Since overhead costs are an ommision to expenses, it

is possible for a company to realize higher profits by simply producing more than the market

requires.

Activity - Based Costing is another method of inventory valuation. In this method,

overhead costs are into consideration just like in absorption costs. However, it is more accurate

since the first step is assigning values to only those activities that are the real cause of the

overheads. It then leads to assigning the costs of these activities only to those products that need

these costs in their production process (DRURY, 2013). Hence, it is possible to trace the exact

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costs of certain activities of production used in a particular product. This method of valuation is

time-consuming and expensive due to the work involved in locating these activities and costing.

There has been increasing use of ABC costing in inventory valuation in the recent past.

There is a significant increase in the overhead manufacturing costs in many production areas, an

increase in the diversity of customer preferences, the different quantities of production where

some products require large batches and others small and finally due to the reason that overhead

costs do not correlate with machine hours and direct labor employed in the production process

(Taschner and Charifzadeh, 2016). When it is necessary to determine the actual production costs

of a production line, this method is the best compared to the other two ways. It can also be used

in financial reporting since it adheres to the IFRS and GAAP standards.

Based on the nature of their reporting requirements, Outdoors Manufactures Limited will

be in apposition to choose the right method to employ between Activity-Based Costing and

Absorption Costing. For more accurate inventory valuation, the ABC method is the best to adopt.

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Reference List

Blocher, E.J., Stout, D.E. and Cokins, G., 2010. Cost management: A strategic emphasis.

Drucker, P., 2012. The practice of management. Routledge.

DRURY, C.M., 2013. Management and cost accounting. Springer.

Morden, T., 2017. Principles of management. Routledge.

Taschner, A. and Charifzadeh, M., 2016. Management and Cost Accounting. John Wiley &

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